When he was in first grade, Chip hurried home one day and announced to his mother, “When I grow up, I’m going to be a book guy!” He clearly could see the future —from high school literary magazine editor to writing bestselling books, from speaking at writing and publishing conferences to representing renowned writers, Chip MacGregor is a book guy.

Ask the Agent: What if my book doesn’t earn out?

Someone wrote to ask, “Is it a big deal if my book doesn’t earn back its advance? What percentage of books earn out? And does a publisher lose money if a book doesn’t earn out?”

I frequently get questions about advances, and to answer them I need your patience… Let me answer this with hard numbers, so that I can make my case. It will take a couple minutes to run the numbers.

First, you always want your books to earn out. Every time. If your book earns out, it means your book is selling, the financials on the book aren’t going to be an ongoing concern, and the publisher is happy and is going to want to work with you again.

But second, keep in mind that only about 25% of books earn back their advance. That number goes up and down according to the year and the economy, but over the years that’s been the figure publishers have used. Which means that of all those books out there, roughly three quarters of them are in the red. That can give you a bit of perspective. (That said, remember: with the massive growth of ebook publishers and smaller houses that pay no advance, there are many more books on the market in which the author was paid nothing — he or she is earning all their income on sales.)

Third, to answer your question about a publisher losing money, keep in mind that every business can lose money. Retail shops, service business, investment firms, everyone. If you own a shoe store, order in shoes that don’t sell, and then have to drastically reduce prices, you can lose money on each pair sold. That’s business, and publishing is no different. The publishing house pays out an advance, they pay an editor, hire a cover designer, buy ink and paper, pay a printer, and cover overhead such as the light bill and the editor’s long distance phone calls. A lot of expenses are involved in every book, so it’s certainly possible for them to lose money if they acquire some bad books, or some non-sellable books. Now, understand that I like and respect publishers, and as a longtime agent, I WANT them to make money and stay in business. That said, the argument put forth that an unearned advance equals a loss for a publisher just isn’t true. (Or at least t’s not the whole truth.) All you have to do is look at some math…

Let’s take some big book the publisher is doing with a celebrity. She’s created a $25 hardcover book, and the publisher has paid her a $100,000 advance. The average discount a bookstore gets when ordering a book is roughly 50% — so they’re paying the publisher $12.50 for that book. (In reality, it could be less, and there are a thousand factors determining that amount, but let’s use a conservative 50% for the sake of clarity). From that amount, you have to subtract the author royalties and, of course, the publisher has to pay for the actual hard costs of the printed book (ink-paper-binding). That $25 book probably cost about $4 to produce. The more copies they printed, the cheaper each copy becomes. There are plenty of things, such as cover features, that can boost the price of a book, but somewhere around $3 to $4 per book is right. (The costs for an e-book are considerably smaller, since there is no ink, paper, binding, shipping, or warehousing.) Some of the publishers state right in their contracts that anything sold at an 85% discount is considered “at cost,” so they’re assuming a hard cost of $3.75 for a $25 book. At several publishing houses, they have a standard “overhead” charge of about $2 per book, or $50,000 per title. So take the $12.50 the publisher received for the book and subtract author royalties ($2.50), hard costs ($3.75) and overhead ($2). Conservatively, the publisher is left with $4.25 per printed book after paying all the bills. In essence, the publisher is making more money per book than the author is making. (And no, there’s nothing wrong with that.)

Still with me? Okay, since this is a big book, let’s say the publisher printed fifty thousand copies and sold half of them. They received $312,500 from bookstores ($12.50 x 25,000 copies sold). They credit the author her royalty of $84,375 ($2.50 x 5000; $3.125 x 5000; $3.75 x 15,000). The author hasn’t earned out — she’s still in the red $15,625, but the publisher is left with $228,125. Out of that they pay $150,000 on printing ($3 x 50,000) and $50,000 in overhead. So the publisher is left with a profit of $28,125. Even if they write off the rest of advance, they’re sitting on $12,500. Maybe they remainder the rest of the books for a dollar each , so they just got in another $25,000 (and royalties aren’t paid on remaindered books), so now the publisher has $37,500. Did you follow that? Yeah, a lot of numbers, but the lesson is simple: The book did NOT earn out, but the publisher still made money.

However, they also sold the e-book, which didn’t have any printing or shipping or warehousing costs. The royalty they pay on the e-book will be greater, but the lack of costs means the publisher actually makes MORE per unit sold. If they sell foreign rights, they’re keeping half that money as well. Over time, the overhead number shrinks considerably, so the per-book profit increases. And this model was created for a book with a relatively high advance — if we’d looked at a $25,000 advance, these costs would swing toward the publisher’s side of the ledger. (Just to make sure you know I’m not pulling numbers out of a hat, I used to be an associate publisher with one of the Big Six in New York, and I had to fill out a P&L form for each book we acquired — so I know what the numbers look like.) Let me state again, I’m not making a case against publishers here — I think they deserve to make their money. I’m just trying to disprove the notion that an unearned advance automatically equals a “loss” on the book. It might just mean a smaller profit.

Several years ago, a publisher paid huge money to Democratic nominee Hillary Clinton for a book. The advance was in the millions, and the book never came close to earning out. Yet the publisher still made money — and admits having done so. Why? Because they sold a bunch of books. The revenues more than covered their costs, so they were making money. My point? Don’t accept the myth that a book must earn out or the publisher is losing money — it’s just not true. I have a good friend who works for a publishing house and has pointed out that the publisher did indeed lose money — in my earlier example, they would have lost the outstanding $15,625 in unearned advance. I think that’s semantics. They didn’t actually LOSE money on the book… what they did was make LESS money, and there’s a difference between a “loss” and an “unearned gain.”

Another publishing friend likes to point out to me that the author made $84,375, while the publisher only made $28,125. But that’s a skewed way of viewing it, because the publisher also made enough to pay all their bills and keep themselves in business. The $28,125 is purely profit — the money left over after everyone has been paid. A better way to view it is to say the author made $84K, and the publisher made $228k. And I’d be glad to compare the hourly rate of any writer, who sits in her chair for days on end, trying to crank out a good novel. Let’s face it — the hourly pay for any writer sucks.

Again, I’m not saying a publisher should lose money, or that I’m opposed to publishers making money — I’m not. In fact, I am ALL FOR publishers making a profit, so that they stay in business and keep buying and selling books. And, in fairness, I should add that publishers DO lose money on some projects. If they paid a huge advance and the book tanked, they lost money. If they spent a fortune on full-page ads in USA Today and nobody bought copies, they lost money. But my point is simple: the majority of books do not earn out their advance, yet publishers stay in business. That alone should help you realize that “failing to earn out” does not equal “the publisher lost money.” I hope that helps clear up the question. Happy to take your comments and questions!

Hi Chip. Great answer.
Here’s my question: If I was to write a contemporary re-imagining of an old classic tale, such as Great Expectations, Northanger Abby, etc, where does it get sticky as far as copyright infringement? Can I say “based on X book”, or should I not mention the classic work at all?

If the book you’re referencing is part of the public domain (and certainly Jane Austen’s titles are PD), then doing a spin on them isn’t infringing on a copyright. Doing that to a book that has a live copyright may indeed be an infringement, though there are exceptions (a satire of a novel is considered freedom of expression, and authors frequently use one story as the inspiration for an entirely new story, to give you two examples, Lisa).

You are correct that a book that doesn’t earn back doesn’t necessarily equate to a loss, every book has a performance goal related to budgeted margin though and most never hit that.

You mentioned a figure known as “overhead” and $2 seems about right, but that generally refers to indirect costs that get applied to every title in a catalog (such as facilities, IT, operations, etc.) but you did not factor in direct costs beyond the physical cost of goods, such as editorial, design, prepress, purchasing, marketing and sales personnel costs. You also left out marketing and sales-related expenses for the book which can range between $.50 and $1.50 per book on average.

It’s true that many books don’t earn out and can still net cash based on direct cash cost of goods, when factoring in the cost to run the entire business the picture changes. however the ultimate true measure of success for any publisher will be a healthy EBITDA.

Simply put profitability for publishers is measured over time and across many different products and it demands fiduciary responsibility at the title level. Books that don’t earn out do have advance write-offs and those are legitimate expenses that cut into a publisher’s profitability and ultimately their ability to invest in more books.

Yeah, I could have included all sorts of other costs, Michael — marketing, cover features, etc. But my goal wasn’t to offer all the details, so much as give the big picture. That said, you and I agree — EBITDA is the key figure for publishers (Earnings Before Interest, Taxes, Depreciation, Amortization). THAT is the amount every publisher is really counting on, and it’s the thing that keeps them in business. But again, I wasn’t talking about the financial status of publishers — I was answering the question “does an unearned advance mean the book lost money?” It does not… though it may mean the publisher didn’t make quite as much.

I’ve been wondering what time frame this all operates within. Does an author aim to earn out their advance in a year? Or just while the book is in print? How long does the average book stay in print? When does remaindering usually occur?

Good questions. And, is there a difference between a backlist title, and a remaindered title? Are they the same? Or are there three stages of inventory movement: frontlist (new), backlist (selling but not new), and remaindered (clearance). I think its the latter.

I suspect the answer to how long a book stays in print is, it depends. Fiction has a much longer life than nonfiction. In the library where I used to work, non-circulating nonfiction older than 10 years was routinely culled. Particularly for business books, people are always looking for the next new idea, so they tend not to last as long. The authors have a lot to do with it, too. Authors who are continually producing new works will likely get their back lists re-discovered and maintain longer sale life. This is also why books in series are recommended. The first book may do mediocre, second book same, and then when third and fourth books in the series come out, suddenly sales of books 1 and 2 shoot up on release of books 3 and 4, and then stay strong as more people discover the series. This is true for both fiction and nonfiction. So there’s a lot of strategy and variables at play.

Totally different things, Laurel. A “frontlist” book is simply a book releasing this season; a “backlist” book is a title that released in a previous season. Being backlist has little to do with remaindering. A “remaindered” title is when the publisher is getting rid of the remaining print copies and clearing them out of the warehouse.

That said, I disagree with you on your second paragraph. For most books, a nonfiction title may stick around for a long time, but most fiction titles that aren’t selling fade quite fast. (That doesn’t apply to novels that do well — they will, as you reference, tend to stick around a long time. But our marketing of fiction is such that most novels tends to be in and out of our conscious pretty quickly.)

As for series sales, you hit on a key difference between the ebook world and the traditional world. If the first book in a series with a traditional publisher doesn’t hit, the rest of the series generally won’t either. On the other hand, quite often an ebook publisher needs several titles in a series for the books to sell. It’s a fascinating business!

The publishing house is hoping you earn out your advance in the first 12 to 18 months, Danika. An author is usually hoping to just earn out eventually, so he or she can start seeing royalty checks! :o)

Remaindering is an economic decision — when the publisher decides it is no longer financially responsible to keep the book in print, they’ll take the leftover copies in the warehouse and offer them to a discounter, usually at cost or close to it. So that $12.99 trade paper novel is being sold to a remainder house for less than $2.